The Union Cabinet has given its approval to the proposal of Union Finance Ministry to promulgate an ordinance to suitably amend the Goods and Services Tax (Compensation to States) Act, 2017.

The approval will allow GST Council to hike the maximum rate of compensation cess levied from the current cap of 15% to 20%. The ordinance will amend Schedule of Section 8 of the GST (Compensation to a State) Act, 2017.

Key Facts

It will be only an “enabling Ordinance” and the decision to increase the compensation cess will be taken by the GST Council, the apex tax rate setting body under the GST regime. The hike in rate of compensation cess will be levied on SUVs, mid-sized, large and luxury cars. It should be noted that compensation cess is applicable not just to cars but also tobacco and coal. It is used to form corpus for compensating the states which experience tax revenue loss post-GST.

Background

In the new GST regime, cars attract the top tax rate of 28%. On top of this, compensation cess of 1-15% is levied for the creation of the state compensation corpus. The post introduction of GST, the total incidence tax on motor vehicles [GST+ Compensation Cess] has come down vis-a-vis pre-GST total tax incidence, making these SUVs, mid-sized, large and luxury cars cheaper post GST rollout. To rectify the anomaly, the GST Council, comprising of representatives of all states, had recommended that the Central government move legislative amendments required for increasing the cess.